I was bemused by two recent claims by so-called members of the left of centre economic community.
One of the confusing claims came from Ann Pettifor in this video. She made many almost incomprehensible claims in her presentation starting at 46.50 minutes in, but the one that I am noting now is her claim that modern monetary theory is not new.
This is, of course, true. MMT is in many ways horribly misnamed, and that's not helped it. But her claim was that we've understood money since 1705 and, apparently, there's no reason to reinvent the definition now. Her reference was to the work of John Law, which does not seem to be widely cited, but can be readily found on Wikipedia here. The FT adds some comment, here, and the RSA has an article as well.**
John Law's great idea was to introduce paper money created by the government. That was innovative, I admit. It's made a big change to the world. It was important. But there was a proviso. His requirement was that the promise to pay printed on the money be backed by precious metal holdings. In other words, this was gold standard paper money. And, according to Ann Pettifor, John Law explained all we need to know about money.
In other words, it would appear that, like far too many of the world's left of centre economists, she has not noticed that the gold standard has gone, finally being put out of its misery when Richard Nixon took the USA off it in August 1971.
Since then we have only had fiat money. And fiat money is money purely backed by government promise, given meaning by the ability of the government to tax. From experience I can tell you that Ann hates any discussion of tax, let alone giving any weight to it as an issue of economic significance, so I would not expect her to go near this definition, but John Weeks, another supposedly progressive economist who appears to be anything but that, had this to say in a tweet exchange with me on Thursday:
.@RichardJMurphy it is generally accepted in history of money that bank notes are fiat & over a 1000 years old. See Weatherford History Of Money or Lannoye History of Money for Understanding Economics .@JoMicheII You are free to have a different view. https://t.co/liYyVYujVD
— john weeks (@johnweeks41) June 11, 2020
So, bank notes are what fiat money is, and that's been true for 1,000 years. That's an interesting idea for three reasons.
First, this makes clear that John has no explanation for electronic money.
Second, it means that he too is fixed in history.
And third, like Ann that suggests that he too has failed to notice the end of the gold standard.
It literally beggars belief to think that those on the left who want to talk about money have failed to notice that what money was and what it is now are quite literally not the same thing.
In Ann's case it's even more staggering when she works with Geoff Tily of the TUC who is steeped in Keynes and yet she has not apparently noticed that Keynes' greatest contribution to WW1 was the introduction of what was called the Bradbury pound - or fiat money that was not convertible into gold, despite which it was readily accepted for exchange. These pounds were withdrawn in the twenties, of course. The rest, as is said, is history.
What I very strongly suspect is that this inability to think that money is no more than a promise and that tax is absolutely and completely central to its valuation is core to the challenge we face over money, and the resulting revolution that this understanding creates in economics.
It's also core to our understanding of the role of government. The ‘hankering for value' that these, and many other economists, display is corrosive. They may say that they know that the gold standard has gone, but such is their desire to deny that tax alone underlines the value of the currency that they try to find substitutes. Most especially, they say that the pound (or any other currency) has value in exchange: it is worth what you can get for it. But in doing so they ignore three things.
The first is that this does not say why you can get things for it.
The second is that this provides no explanation of money as a store of value because the value is only implicit at the moment of exchange.
And third this ignores the fact that this makes government dependent on markets to determine the value of the money it makes which then makes something of a folly of the whole exercise of trying to control the value of that money which has been the core objective of their macroeconomics for decades past.
In effect, what the argument suggests is that not only is value determined by the market, but is created by it and therefore the government is dependent upon the market for its revenues before it can do anything. Every one of those is wrong.
I very strongly suspect that this will be denied, but from observation over a long time I think that these sentiments are commonplace, even if not often stated as boldly as Ann and John did. The hankering for ‘there's got to be something more to money than a promise' is very, very strong. As J K Galbraith said:
“The process by which banks create money is so simple that the mind is repelled“
These economists are repelled. That money creation is just double-entry book-keeping just adds to the repulsion. How can it be that something so inferior, like accounting, might create anything of value, they ask?
And of course the answer is that it does not. But it is a fact that accounting alone can record the exchange of promises that creates money. And in the process accounting actually creates the current manifestation of what money is, which is entries in ledgers. That is what fiat money is now. Forget the farcical references to notes both John Weeks and Ann Pettifor rely on. Physical manifestations of the promises implicit in money are a dying residue of an old era and understanding, something I see almost daily when my sons refuse payment from me in cash because they have no use for it. This means that accounting alone can record both money's creation and destruction, which few economists can get their heads around.
As Galbraith so clearly understood, that something so important can be so simple is repulsive to the mind seeking complex answers.
That tax gives these records value, with an essential time component added as a consequence, which then means that this aspect of MMT necessarily contributes to a theory of inflation and provides an explanation as to how to address the issue, just adds insult to the injury.
That is, I think why MMT cannot get traction with these economists right now. Or rather it's that, and one either thing. Having spent so long learning how they think money and banking works, with asset backing, banks as intermediaries, and maybe in more radical moments accepting that if money is credit then it is the private sector banks who create that credit, the idea that money is in fact made by the state after all, and is also given its power by the state is something they just cannot accept because it requires them to rethink everything, and they have too much invested in what they have already learned to do that.
And so we suffer supposedly left wing economists who deny the power of the state to create money. And who would rather we retain the idea that the state is dependent on private sector generated revenue than accept that it is in fact the private sector that is dependent on government-created money to stimulate the demand it requires to thrive. And so would rather do anything to eliminate what they call debt - which is how the state injects value into the economy - than believe that value can be created by government action, working with private sector partners.
No wonder the left is in trouble. Most is its economists don't believe in the power of the state. Which is pretty worrying.
__________
** Footnote added 1t 15.10: I have checked out Law in Galbraith 'Money, whence it came, where it went' and the story about the quest for gold (and land) backing for his currency is actually much more complicated than my summary above implies, but does not change the substance on my comment.
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“Most is its economists don’t believe in the power of the state. Which is pretty worrying.”
As a general statement in isolation, unfortunately the majority of the electorate don’t trust the State with its existing power and control let alone granting it more… could you imagine Corbyn, McDonnell, Raynor, Abbott etc or Johnson, Gove, Rahb etc etc with more power and control.. who can trust them or any politicians for that matter.
So who do you trust then?
“Who do you trust then”..
All I would say is a decentralisation of power is needed will more checks and balances as opposed to the centralisation of authority you are suggesting
And how do you run a macroeconomy without central control of the value of money and overall taxation?
Thanks Richard. I’m with you on this but the business of taxation underwriting the value of the currency is worrying at these times. We have a very right wing government that seems hell bent on tearing up all the certainties of the past. What would happen if these clowns passed a bill demanding that all taxes must be paid in Bitcoin or some other cryptocurrency that they and their friends controlled. With their majority they are in a position to pass anything. MMT would then pass into history. The worry is that this lot are capable of anything.
Including collapsing the state….
Taxes paid with bitcoin – is that the next big thing for Cummings et al?
I am fascinated by the rehabilitation of JohnLaw. Neoliberalism was gleefully dismissing him as a scoundrel for most of the twentieth century. In fact it is perhaps rather a sign that all is not well with Neoliberalism that he is now rediscovered. Here is what the monetary economist at John Hopkins, Steve Hanke wrote about Law a few years ago (a little like Law, Hanke is, I think perhaps also a trader):
“What merits attention is that Law was an economist of note and a precursor to John Maynard Keynes and Keynesian economics. Indeed, Law’s Essay on a Land Bank (1704) and Money and Trade (1705) brought high praise from no less than Joseph Schumpeter, who wrote in A History of Economic Analysis: “John Law (1671—1729) I have always felt in a class by himself. He worked out the economics of his projects with a brilliance and, yes, profundity, which places him in the front ranks of monetary theorists of all time.”
I think Law said different things about backing for currency at different times, but the need to back paper issues I suspect stems from something people no longer quite understand. Nobody trusted Government in turn of the 17th/18th century Scotland. There was little reason to do so. Scotland was going through the worst crisis, probably in real terms for most people, of its history; in the final decades of the seventeenth century. A Restoration Government prevailed that was hated by half the country, political unrest, a slew of executions for uprisings, Jacobitism haunting a Revolutionary Government after 1689, an economic crash, famine, the Darien disaster, and all the political, dynastic and religious machinations of Scotland, grappling with its elephantine neighbour in a period of crisis for both: Law could not elicit support for his ideas, and abandoned Scotland for France (the rest is history, as they say).
Remember this was a time people were clipping coinage, and hanging for it in England; and in Scotland most people were still paid in kind, because there was a shortage of money and credit. To the extent Law supported “backing” for a currency, I suspect it is because nobody really trusted Government; either its trustworthiness or its stability and likely survival. Trust is fundamental to a fiat currency; you must believe in the promis to pay. Most people would not have forgotten the grim years of Lauderdale’s leadership, the instability of Jacobitism hovering over Parliament; or the alternative: an unsteady conciliation among the likes of Queensbury, Tweedale or Hamilton?
I am glad I did not have to explain a fiat currency to a crowd in the Lawnmarket around 1703; when they asked me in broad Scots who was making the “promise to pay”?
I should have added this from Hanke, but managed to leave it out:
“In June 1716 [Paris], Law launched his first big project. It was then that the Banque Générale was established. It issued paper money which was not fully backed by specie (gold or silver). Instead, government bonds were used to back 50% of the paper money issued by the Banque Générale. This fractional reserve setup was approved by the Crown and the Banque’s paper money was granted legal tender status.
This represented a breakthrough for Law because one of his ideas was to replace specie†based banking systems with credit based systems. Instead of counterbalancing banks’ liabilities (paper money and deposits) with gold or silver assets, the liabilities in a credit†based system would be counterbalanced with loans. Interestingly, the international monetary system today looks a great deal like the credit†based system envisioned by Law. Indeed, in 1971–300 years after John Law’s birth–the international monetary system abandoned the last vestiges of the gold standard.”
Hanke provided an accompanying table to illustrate the two different systems, but for reasons unknown I could not locate it.
Accepted
But there was gold
And then loans? How can a liability back a liability that must be repaid using the money it is supposedly backing?
I think I have oversimplified Law in the post. His ideas may have been worse than I suggested. No wonder they failed
It also did not help that he fraudulently suggested asset backing that did not exist
He broke the rule that money is a promise to pay by breaking the trust that underpins a promise
Really not a good place to locate a theory of money
“He broke the rule that money is a promise to pay by breaking the trust that underpins a promise”.
Well yes; but he was the only person who even attempted to approach the issue. I suspect his problem was that he was too far ahead of the times. It ended in disaster, but I think that is less than the full story.
I think Schumacher was more understanding of Law. In France money and valuables were stored under the bed. I did point out (first comment) that the problem in the very early 18th century was lack of confidence in the Government that made the promise. That was something properly established only in the 20th century. It is a lot easier after 1950, when everyone finally realises that the ‘Gold Standard’ is the almighty dollar. This is a completey different environment to establish trust on such a public national and international scale. 200+ years earlier it was not realistic.
My real point is that the essence of fiat money is the promise to pay. I believe John Law probably understood that, but he couldn’t trust in it, because the public wouldn’t accept it without ‘backing’; and not without good reason.
The essence is that now Governments and Central Banks know (even if some will not admit) that the promise to pay is everything. I do not believe for one second that a 17th or 18th century state could have only, publicly supported a fiat currency.
Look at the problems that we are having with economists recognising that it is all; all a fundamental and simple matter of trust.
Thanks
Could I finally add that when it is said that the real constraint on issuing money is the economic resources available and inflation; that is because in turn that is wholly dependent even more fundamentally on the trust between payee and payer. We use the currency because ‘de facto’, we trust it. Period. The constraints are functions of the underpinning trust in the currency, that is why the real constraints are crucial – to protect trust.
Precisely
Are there any politicians, economists or academics in the UK who support MMT along the lines you advocate?
Only a few
So, my mis-trust of the Labour party is well placed.
Plenty on the Left (or think they are ‘Left’) hate taxation – which to me as an anti-Statist position.
If you are on the Left you are supposed to want to use the State as a power for good – for ridding society of the ills you have seen the State support previously. As you say, it is just plain silly and worrying. If the State is not behind change how do you implement it?
This is a great post – very thought provoking and once again irons out some wrinkles in MMT.
Never mind buying my kids Stephanie Kelton’s book, if I had the means I’d buy a copy for every member of parliament!!!
🙂
I think its the latter Richard, their whole career is predicated on their models of how the monetary economy works, which just so happen to be wrong. A scientist would at this point acknowledge their mistake, accept the evidence before their eyes and move on to the next problem.
The crux of the matter, as you know, is that economics is more of a religion than a science – these beliefs about money are an article of faith. Evidence, unfortunately, doesn’t come in to it.
The transition from Ptolemy to Copernicus i imagine had similar disagreements – people just have to get over their own ego and accept reality.
Indeed…
Scientists are not very good at this either. Witness the statement that science advances one funeral at a time. More specifically have a look at Alex du Toit and his theory in the 1920s of Continental Drift. Or more recently the all fat is bad theory when it turned out it was really sugar.
I think it was a recent Steve Keen quote, that Economics is to Science what Astrology is to Astronomy.
Deeply ingrained beliefs, too often in denial of observable reality
“Economics is to Science what Astrology is to Astronomy.”
Just perfection!
It isn’t astrology, but Newton was more than a dabbler in alchemy. He was, for example a serious student of the alchemy of the physician and alchemist Pierre Jean Fabré (1588-1658), sometime physician to Louis XIII, but also an alchemist who is reported to have claimed to have transmuted lead to silver in 1627. Newton owned a comprehensive and well-thumbed set of Fabré’s works, from which he took extensive notes for his own work on the subject, which is considered by some Newton apologists to be largely chemistry, but which has never quite escaped the discoveries scholars keep making of the alchemical mystification surrounding it, and Newton.
Perhaps now we know where the ‘Gold Standard’ really came from …..
Richard, who are these so-called left of centre think tanks? From what you say, they do not seem to do much thinking at all. As John D said on another post (I paraphrase), do not waste your time engaging with numpties. There is nothing to be gained. Also, the left is a very contested space; no one group can claim any mandate to speak for all. Should you wish to engage with a knowledgeable constituency on the left, I can think of few better than Richard D Wolff. Like you, he is in complete control of his brief, and he has a relaxed and engaging debating style, an in-depth knowledge of the subject matter altogether a different league from the so-called left of centre think tanks with whom you seem to engage. Professor Wolff would I believe strongly agree with you on some issues but also fundamentally disagree on others — an ideal set-up for a memorable encounter from which we could all benefit and learn.
Our paths have never crossed….
I’ve tried (from the RD Wolff end) to make a connection, but all too busy so far. And understandably so, too.
Fyi
htpps://rdwolff.com
Thanks
There have been instances of fiat paper currency backed not by precious metal but by the fiat of the Kublai Khan government in China
http://www.computersmiths.com/chineseinvention/papermoney.htm
and
https://www.thoughtco.com/the-invention-of-paper-money-195167
– but I cannot find out specifically if it was also valid for tax payment, though when government issued it I cannot imagine how it could not be. It didn’t last because of the eventual inflation. So that would support your contention of economists being blinded by the history! I have little doubt that with the Chinese having invented paper and then substituting it for and not backing it with specie money, that was a sufficiently mind boggling reform in itself – I doubt any thought was given to the ‘role’ of tax.
Which, as you suggest, should not, particularly after the Bradbury pound and Nixon having done his deed, be the case 750 years later…
Peter and Richard,
I don’t know if you know of this interesting “high culture” wrinkle on the issue of paper money, encompassing Goethe, Faust and Mephistopheles?
One from the FT:
https://www.ft.com/content/5266719f-ab71-36d2-9763-b37fa82752a8
And one from the Irish Times:
https://www.irishtimes.com/news/goethe-money-and-the-faustian-pact-1.2054
The truth is that Law did what is described – the gold backing for his money in France was claimed to be about to be mined in French territories in what became the USA at the time
It wasn’t of course
I suspect that is where the plot came from….
Can we think of it as a continually adjusted competition / series of competitions for (acquisition of) money (ultimately) created by government? As long as there is belief that the tokens won (i.e. money) will retain value through the competition and through future competitions, it is worth playing the game. Am I getting close?
A bit like Lizzie Magie’s game, Monopoly/Landlord’s Game, only the government can step in and amend the rules more or less at any time as long as confidence is retained by the players in the game itself. It is then quite sensible that to produce certain effects, the government (governor of the game) might sometimes produce or destroy money to produce different effects on the board.
Something like that???
I admit I’m not sure that works for me
Very well said Richard. Just like the media economists are the last to hear the news.
The desire to find “foundations” of value, or in a wider sense, meaning, is, I think, well known to philosophy, particularly with regard to language. The human need for some kind of “ultimate signifier” , like the gold standard, runs very deep. I hope I will be corrected if wrong, but didn’t the later Wittgenstein maintain that it is how we use a word that matters, and not, so to speak, it’s inherent “exchange value”.
I won’t claim expertise on Wittgenstein
I know those who justifiably do
I don’t
This had to be said.
Ann is a good person, but she has sniped at MMT at every opportunity on twitter and most definitely looks down her nose at accountancy and sectoral balances. Its both closed minded and most unbecoming.
I’m sure John Weeks also has a good heart, but he completely undermines his credibility by tweeting untruths such as “MMT asserts that deficits are not inflationary”. He also tweeted support of FPTP, so I’m afraid I just can’t take him seriously.
I think you’re right, they’re stuck in the past.
I know both these two – and like them as people
I am not amused that both will publish wholly untrue statements about me and MMT though and seem to think that’s OK
On the topic of Ann Pettifor and John Weeks fixating on the invention paper money by Law.
This is but a footnote compared to the entire history of civilisation. Ann and John seriously need to talk to David Graeber and other anthropologists who will quickly point out that the norm across society is that ‘money’ is debt i.e. is an IOU. And, as David’s book points out, that’s been the case for at least 5,000 years (apart from brief episodes were coinage or gold prevailed – that in any case arose much later).
So, although Ann might hate it, accountancy rules!
David and I co-signed the principles for post-Covid society noted here the other day
ON the naming of MMT. Randy Wray says the name “Modern Money Theory”, comes from the following statement by Keynes in his Treatise on Money about what serves as the money of account as well as dictates what “thing”will be accepted as money.
Thanks
Lovely piece. As you say, quite apart from defending their intellectual record, many of these economists answer tactically. Even the great Michael Hudson does so — depending on his aim, and his audience, he may take the MMT line (which he actually prefigured in the early 1970s), he may prefer an explanation based on Marxist theories of value, or even, sometimes in Superimperialism, he seems on occasion almost to elide the different effects of budget deficits and balance-of-payments deficits. Now I think he a great guy — really his ideas are the “bee’s knees” — and sometimes it can just be pedantic to insist on every nuance, when one is trying to convey a general notion simply. At this moment, a little more precision and consistency (that “bugbear of mediocre minds”) may be needed.
I think the “left” has a problem with MMT because they still believe that government debt is the same as private debt. They can’t get past Chapter 1 of Stephanie Kelton’s book. Until they get that then we can get nowhere.
I am also concerned about how much we have “forgotten” about MMT.
I do think that Keynes captured virtually all of the ideas of MMT and that for 30 years after the war some (but certainly nowhere near all) of those ideas where embraced by governments. Unfortunately, the experience of the 70s has now gone into folklore as a morality tale against the ideas that MMT espouses. All I would say is that the 70s weren’t that bad (but I was a teenager – how hard is it to have fun when you are young?). More importantly, it was not Keynes’s (MMT’s) ideas that were discredited – rather a misuse of those ideas combined with massive external shocks that allowed Margaret Thatcher to throw the baby out with the bath water to push her small government agenda.
In Cambridge academic circles Keynes is still revered…. if only that respect were more widespread.
I had a note from an economist I respect who gets MMT today who said he thinks Keynes did get MMT in 1914 and even before, in India
But Keynes was fickle and appeared to move from this position later
Keynes argued with Lerner
I have a feeling he did very definitely have a problem with the ideas at MMT at the end of his life
I bet twenty years later he would have been back with it….
Point taken about “late” Keynes.
It’s just that it infuriates me that many MMT ideas were airbrushed out of history in the 1980s and that the ideas are now billed by opponents as “radically new and suspect”…. and therefore many ordinary people are cautious. In fact, it is the last 40 years that have been the failed, radical experiment and that after a generation of madness we now have a chance to return to ideas that have worked well for us in the past and are working for Japan today.
Agreed
Another Keynes quote, “When my information changes, I alter my conclusions. What do you do, sir?”
Certainly what he would have to say about pandemics and global heating would be more interesting than most other economists I can think of, or at least on a par with Michal Kalecki.
🙂
Sorry to ‘butt in’ here, but I do ask, if we are cutting Keynes some slack about theory, might we do the same for Law?
Hi Richard,
I listened to a podcast recently with Sam Levey, I think. They had a similar discussion which led to the fact that mainstream economists arguments about ‘private money’ hold up until the trust is broken. When the IOU is not paid, it’s straight back to the public sector to get it sorted out. The public legal system is what defends the value at the end of the day. The conversation joined a few more dots for me in my quest to advance from dunce status in economics.
The economists I am referring to also like to say money is made by banks in the ‘real economy’ as if the state is unreal and that’s where 95% of money is created
It’s laughable ….
I know I may be simplistic, but money created by banks is ultimately destroyed by virtue of it having to be paid back whereas money spent by government adds to the total supply as it is not all required to be returned [the deficit]. No taxes can be paid unless the government issues the pounds and pence in the first place that, through spending enables those taxes that are due are able to be paid. So spend and tax is the reality.
Agreed
Sorry to lower the tone but just a silly question.
Modern Monetary Theory MMT
Magic Money Tree MMT
Was the latter coined at some point to insult the former or the reverse or is it just a total coincidence that the initials are the same?
I always presume it is meant to be an insult
Trouble is, it exists
MMT is a misnomer: it’s neither modern nor a theory, it’s how sovereign fiat currencies have worked since they were first invented, so it’s not a theory – it’s factual. Why not MCS – Monetary Cycle System, or MCM – Monetary Cycle Method? These describe better the issuance/creation of money and its eventual cancellation through taxation
Unfortunately the chance of rebranding is zero…..
Left economists not believing in the power of the state to create currency in its own right (despite the existence of the Royal Mint) and relying effectively on the “kindness of the private sector” can’t really be called left-wing can they? Left-wing eunnuchs maybe!
Any views….
https://www.zerohedge.com/economics/mmt-ephemeral-cult-symptomatic-peak-macroeconomics
Yes
They’re stupid enough to believe in the gold standard
Need I say more?
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